Computer Savvy: Analysis

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As members of a SPA-IRM group, cattlemen began to understand which data they needed to keep in order to analyze their ranching business efficiency from a variety of angles. SPA is nothing new; it's still an extremely useful tool in gauging efficiency in a herd.

As members of a SPA-IRM group, cattlemen began to understand which data they needed to keep in order to analyze their ranching business efficiency from a variety of angles. SPA is nothing new; it's still an extremely useful tool in gauging efficiency in a herd. The balance sheet and income statements are used to look at business efficiency and profitability, which, in turn, are used to develop standards to measure financial performance.

“This type of management is definitely a learned thought process,” says Eric Mousel, a South Dakota State University range livestock production specialist who administers the SPA-IRM groups. “Doing this type of analysis helps give producers that kind of thought process. You just can't make blind decisions.”

Decision-making is one of the chief reasons for conducting year-end analyses, in Harlan Hughes' opinion. A farm business consultant and BEEF “Market Advisor” columnist, Hughes wants producers to make management decisions based on the facts of the operation — not county averages or published numbers.

“Collecting data doesn't do you any good; you have to convert it to information. A year-end analysis does that,” Hughes says. “It takes data from the ranch and converts it to information.”

The process of conducting a year-end analysis can be overwhelming, which is why working with SPA-IRM groups and specialists is a good option.

Gessner says that's one of the most rewarding parts of her job — helping producers feel empowered to make decisions by understanding their unit cost of production (UCOP), also known as breakevens.

Gessner and Mousel begin by calculating production efficiency using SPA measurements, such as adjusted number of breeding females exposed — the basis for reproductive efficiency measurements — and gauging how long the breeding season is.

After that, it's on to weaning data, where Gessner is looking for the percentage of calves born alive and saleable at weaning. “These are primary determinants to adjust cost per cow based on efficiency performance,” she explains, “which, in turn, heavily influences profitability.”

Gessner stresses that it's not about having the highest weaning weights. “We're looking at efficiency — not bragging rights. Maybe we're better off weaning 450-lb. calves than 800-lb. calves if we can't do it efficiently.”

From there, Mousel and Gessner analyze the operation's financial data, which brings up the low-cost producer misnomer. When Hughes says “low-cost,” many cattlemen think that means cutting costs per cow.

“When I say low-cost, I'm thinking low cost per hundred pounds of calf produced,” Hughes says. This is also known as UCOP, which Mousel also advocates.

“It's what every other industry does, but where agriculture has lagged,” Mousel says.

There are major differences between low cost and UCOP.

For example, to have a low cost per cow, the cow doesn't have to have a calf because production isn't factored in. “I may be a low-cost-per-cow producer, but I have no calves to sell,” Hughes says.

Producers think that by cutting costs $10-$50/cow, they've done the right thing. Not so if it reduces production, Hughes says.

On the flip side, a rancher can have high costs and still have a low UCOP, if he has high production. The UCOP is a ratio of total costs per cow for your cowherd, divided by total pounds of calf produced, Hughes explains.

Barry Dunn, executive director of the King Ranch Institute for Ranch Management, gives this example: Rancher A has a $600/cow cost while rancher B has a $400/cow cost. Rancher A can have a lower UCOP by having higher production (e.g., higher percentage of calves weaned).

“If you can spend one more dollar and make two dollars, you should do that,” Dunn says.

Hughes' data, along with Texas SPA data and other data points, all lead to this conclusion: “He who has the lowest unit cost has the highest profit.”

Dunn adds that understanding break-evens can assist cattlemen in marketing. For example, if you know it costs you 75¢ to wean 1 lb. of calf and the calf market is $1/lb., you know your margin is 25¢/lb. Knowing those margins will become increasingly important as margins narrow. To note, 2004-2006 had some of the largest cow-calf margins in history. Dunn believes 2007 margins will narrow.

Hughes' data shows a huge range in UCOP among ranches — as much as $60 difference between the lowest one-third cost producers and the highest one-third. For reference, Hughes' 2005 IRM producers' average UCOP was $105/cwt.

Costs of production are obviously increasing — land, fuel, feed costs, etc. In fact, Cattle-Fax cites a 20% increase in production costs over the past two years for running cows; North Dakota Farm Business Management Association data reflect a 10% increase last year. Hughes reminds cattlemen that each new piece of equipment purchased elevates the cost of production.